The Ebola news pressured shares of airlines and other transportation names, with the NYSE ARCA Airline index falling 3.1 per cent, the biggest percentage decline since January. The Dow Jones transportation average dropped 2.5 per cent, its biggest daily percentage drop since February.
Small-cap stocks extended recent losses and the Russell 2000 closed more than 10 per cent below its closing high of 1,208.65 in early March, which puts the index in correction territory. It was down 1.5 per cent on the day.
"The small caps have lost the leadership, and a lot of it is the lack of liquidity with those issues. There's much more liquidity in the large caps right now, and when you're experiencing volatility, institutions tend to run toward the large caps," said Bruce Zaro, chief technical strategist at Bolton Global Asset Management in Boston.
The latest decline was the S&P 500's third in a row and followed signs of an uneven expansion in the US economy. Growth in US factory activity slowed more than expected in September even as hiring in the private sector accelerated.
The CBOE Volatility index, Wall Street's fear gauge, ended up 2.5 per cent.
The day's losses were broad, with all of the 10 S&P 500 sector ending in the red except for utilities.
Among airline stocks, Southwest Airlines fell 3.6 per cent to $32.55 and Delta Air Lines dropped 3.5 per cent to $34.90.
Shares of drugmakers with Ebola treatments in the pipeline were up sharply. US shares of Tekmira Pharmaceuticals climbed 18.2 per cent.
The Dow Jones industrial average fell 238.19 points, or 1.4 per cent, to 16,804.71, the S&P 500 lost 26.13 points, or 1.32 per cent, to 1,946.16 and the Nasdaq Composite dropped 71.31 points, or 1.59 per cent, to 4,422.09.
About 8 billion shares changed hands on US exchanges, above the 6.3 billion average for the last five sessions, according to data from BATS Global Markets.
The largest percentage gainer on the New York Stock Exchange was China Green Agriculture, which rose 13.64 per cent to $2.25, while the largest percentage decliner was Centrus Energy, which fell 25.27 per cent to $7.63.
Among the most active stocks on the NYSE were Brazil's Petrobras, down 6.27 per cent at $13.30, and Ford Motor, down 1.35 per cent at $14.59.
On the Nasdaq, Facebook, down 3.1 per cent at $76.56, was among the most actively traded.
Declining issues outnumbered advancing ones on the NYSE by 2,319 to 760, for a 3.05-to-1 ratio on the downside; on the Nasdaq, 2,123 issues fell and 597 advanced for a 3.56-to-1 ratio.
The benchmark S&P 500 index posted three new 52-week highs and 22 new lows; the Nasdaq Composite recorded 16 new highs and 248 new lows.
Copyright: Thomson Reuters 2014